When businesses raise capital, they may choose to use a nominee company structure rather than manage the shares themselves.
A nominee is a company that is nominated to hold assets on behalf of another entity. In early stage investing, the nominee’s role is to hold shares in a company on behalf of the underlying investors in the business. These types of structures are designed to reduce complexity and make the investment process and ongoing relationships easier and simpler for both issuers and investors.
The nominee acts as directed by the underlying investors in relation to their shares. The terms and conditions on which the nominee acts are set out in a nominee deed poll and the nominee manages a range of activities according to the instructions of the investors, including:
The nominee simplifies some parts of the capital raising process and ongoing investor relations. In some countries there are legal rules that apply to companies based on the number of recorded investors they have. For New Zealand companies, this includes enhanced financial reporting obligations for those companies with 10 or more shareholders. Additionally, the Takeovers Code also applies to New Zealand companies with more than 50 (voting) shareholders and 50 share parcels.
As a nominee company only counts as one investor, these extra requirements can be reduced by using a nominee structure.
Using a nominee company can also reduce the administration requirements from investor voting and consents, while simplifying the company's share register and cap table. The nominee structure also provides a level of confidentiality as shares are held in the name of a nominee rather than that of the beneficial investor.
A nominee company can save time and minimise the risk of lost opportunities arising from time delays. For example, sharebrokers often use a nominee company to help facilitate transactions while leaving their clients as the real owner of shares.
A nominee does not guarantee the investment or provide investment advice. The nominee company only has the discretion to act on behalf of an investor where that investor has failed to validly respond to a request for direction in respect of their shares.
For New Zealand companies, The Snowball Effect provides a Nominee Management Service. This includes the undertaking of Anti-Money Laundering (AML) and compliance checks, and the ongoing monthly management of the nominee company.
The nominee structures used are consistent with best practice around the world for early-stage investing and online private equity investments including the Seedrs Nominee structure in the UK and the SeedInvest Special Purpose Vehicles in the USA.
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DISCLAIMER: This article is for informational purposes only, and contains general information only. Orchestra is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.